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Last Monday, on the open, my trading screen was red due to a large gap down in the market. In the financial news media, all I could hear and read were stories about Evergrande, a Chinese property developer who was having trouble making debt payments on $305 billion of debt. I even read that this could be China’s Lehman Brothers moment. 

Was I scared? Did I panic? No way, I’d read about Evergrande weeks earlier during my habitual reading. This was not a new story. In fact, having been short the market days earlier, I was getting ready to scoop up some of my favorite stocks.

Price Action

Trading is a game of psychology and temperament. I’ve been doing this a while, about 20 years or so, and I understand the games being played because I’ve seen it time and time again. Coming into the Monday selloff, it was obvious the market was weak. The market would sell off intraday, gap up the next day and sell off again. This happened on at least 3 occasions and was a stark contrast to the steady grinding action we’d seen for months. Now it’s one thing to notice price action, but what did it all mean?

Psychology of Market Participants

If I had read about Evergrande a few weeks ago, it certainly means large hedge funds, and in particular, insiders at Evergrande and China knew about the upcoming debt payment weeks if not months ago. And this was evident in the price action. If you want to get rid of a large position at the best price, you’d do it just as the market behaved. Sell as much intraday slowly into big liquidity. Gap the stocks and the market the next day to make everyone think that everything is fine, then as soon as the market opens, press the sell button all day again. That’s how the smart money insiders unload into all the buyers- retail and pension funds that buy every day, no matter what.

Understanding this, when we get a large gap down, and the financial media is screaming it’s the end of the world because a Chinese company has a boatload of debt it can’t make timely payments on, I don’t panic, I don’t flinch. I start licking my lips because I am prepared for what might happen next.

The Smart Money

You see, the smart money was already selling days in advance. They’d been offloading as much stock as they could and, in my opinion, to buy back at better prices. Once the scary headlines are out on the T.V scaring retail out of their positions, that’s the time to get in at good prices. I want to buy when there’s blood in the streets. Now don’t get me wrong, stocks can go much lower when there is bad news and fundamentals changes. The point is that in this case, insiders were already selling weeks prior. The smart money already knew and was getting out. By the time this news was on the T.V with a huge gap down, that is not the time to sell. That’s the sucker play. It was time to go shopping, as I explained to subscribers in the Master’s club.

Let’s study a chart of the broader market:

60 minute chart of the SPY

The Trade Ideas

As we can see in the chart of the SPY above, we gapped down below the prior major support of $436. I understood that we could go lower after the open, and that is why I slowly began to scale into my favorite stocks. In fact, I was buying for most of the day coming into midday. I bought GOOGL, BYND, RBLX, QQQ, HOOD, and SAVA, all stocks that I liked coming into the day’s selloff. Having been short the market and making sure I had buying power available I went on a shopping spree. As we saw for the rest of the week, it was a pretty good idea.

I was able to get out of some of my positions on the immediate bounce the same day and was slowly getting out on the move back to the 200-hour moving average throughout the week. Often after a large selloff, the market will eventually bounce back to the 200 hour where it may become resistance, as was the case here.

Bottom Line

Proper preparation can decrease the chance of poor performance. I wasn’t scared about the Evergrande headline when the financial news media were scaremongering. I’d known about the company for weeks. I saw insiders getting out of large positions from my observation of the price action in the previous days. Coming into the large gap down, when the opportunity to shake out weak retail hands came, I was ready to go on a bargain hunt and hoover up great stocks just as the big boys usually do. Being prepared takes the emotions out of trading, and when everyone is losing their heads, I use my experience to take great trading setups.

Author:
Jeff Bishop

One of the best traders anywhere, over the past 20 years Jeff’s made multi-millions trading stocks, ETFs, and options. He is renowned as an incredible trader with a deep insight and a sensitive pulse on the markets and the economy. Jeff Bishop is CEO and Co-Founder of RagingBull.com.

Even greater than his prowess as a trader is his skill and passion in teaching others how to trade and rake in profits while managing risk.

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